4.5 Khula Credit Guarantee Scheme
4.5.5 Challenges
4.5.5.1 Guarantee Scheme
The challenges faced by the Guarantee Scheme is that banks might transfer all loans which are perceived as risky to the guarantee scheme, even if the bank is able to obtain adequate collateral. This does not contribute to reducing the problem of high loan (operation and administration) costs, which is a prominent reason for the reluctance of commercial banks to lend to small businesses. If a large enough revenue stream is not established to spread costs over a great number of operations, high administration costs will consume the capital of the guarantee fund (Gstraunthaler & Cramer, 2012).
4.5.5.2 The banks
The challenges faced by South African banks which have utilized the Khula Credit Guarantee Scheme can be summarized as follows (Nigrini & Schoombee, 2002; Mago & Toro, 2013;
Okeke-Uzodike et al., 2018):
Fear that settlement of claims will involve considerable delays and costly administration.
A strained relationship as Khula often promotes its services directly to entrepreneurs rather than to the banks. This creates certain expectations among entrepreneurs about the possibilities of the guarantee scheme, but banks must still meet the criteria set by Khula. The result often is friction between the SMMEs, banks, and Khula.
If the annual premium is not paid to Khula, the guarantee lapses. This places administration pressure on the banks, as the bank will not recover the money owing by the borrower if the borrower forfeits.
Banks are generally unhappy with the way in which Khula calculates the indemnity fee.
By not taking into account the value of the security offered by the customer, Khula’s fee is seen to be excessive. If collateral does exist, the banks must take it, place a value on it, and deduct it from the loan value (unsecured exposure) in the event of a claim. The potential risk for banks is then the unsecured portion of the loan, plus the unrealised collateral value, as the collateral may not yield its full value in the case of a forced sale.
Banks also incur costs to assess loan applications. There is apparently no consensus internationally on who should take responsibility for this function. The 3% guarantee fee that Khula charges appear high in relation to international experience and the way in which the fee is calculated is also of the utmost concern to the banks, who feel that it results in an excessive fee.
In the event that the bank submits a claim, and Khula is of the opinion that the bank has misreported any information on the customer, Khula may disregard the banks claim or charge the bank a penalty fee. Some banks feel that there is not enough transparency in this process and that it could lead to them suffering unnecessary losses. Gstraunthaler and Cramer (2012) provide examples in Malaysia and Nigeria where claims were rejected on the grounds of technicalities; and
It is a requirement for banks to take judgment before being able to claim from the Guarantee Scheme in the event of default of the borrower. The collection costs to take judgment is very high for banks. Furthermore, if any funds are collected from the borrower at any point in the collections process, the funds are to be apportioned between Khula and the bank.
The above highlights an array of problems with the Khula Credit Guarantee Scheme.
Furthermore, the FinMark Trust Survey conducted during 2009 emphasized that the Khula programme did not prove to reach the poorer market. Mthimkulu and Aziakpono (2012) noted that Khula failed to meet its mandate as the scheme largely benefited white-owned large businesses than its intended black SMME clientele. Ligthelm and Cant (2003), and Rogerson
(2006) conquer that Government support in South Africa mostly neglects the large group of informal enterprises, adding that overall the growth in the small business economy does not necessarily reflect the success or impact of government support programmes.
Thurlow and Wobst (2004) and Rogerson (2007) add that the services provided by Khula do not take into consideration the unique nature of small businesses in South Africa. Moreover, a study by Mago and Toro (2013) revealed that Khula failed to encourage commercial banks to lend to SMMEs as the level of utilization of the credit guarantee scheme was far below expectations. The other concern is that micro-entrepreneurs are unaware of the existence of the Guarantee Scheme (Berry et al., 2002). The Finmark Trust study revealed that only 2% of the business owners were aware of the Guarantee Scheme (Porteous, 2007). According to Job (2013:1), the Khula Credit Guarantee Scheme in totality never topped 800 guarantees since its launch in 1996 and credit by banks has been on the decline. This does not compare well with emerging market peers such as Chile, Malaysia, India, and Brazil which lends out thousands of loans a year using credit guarantees (Job, 2013:1).
SEFA as mentioned previously since took over the Khula Guarantee Scheme. Based on the above challenges, SEFA migrated into different avenues. SEFA continues to use the channels used by Khula, that is; banks and financial institutions which on-lend to small businesses, but since added a third channel, that of direct lending, through direct lending products. The aim is to achieve a national branch network providing the new products (Job, 2013:1). Migro (2005:3) however states that this is a major concern for the success of the Khula Credit Guarantee Scheme considering that the major channel for the Guarantee Scheme is Banks. Migro (2005:3) emphasizes the importance of banks as a channel saying that once the initial start- up phase of a business has been completed, banks are the most important providers of the financial means in the early growth phase, as previously identified in Chapter 2.
The other avenue which SEFA diversified to is changing from the Individual-retail-selective model to the Portfolio model. The challenges for banks, however, remains the same with regards to the collections cost as it is still a requirement for the banks to take full judgment and distribute all funds collected from the borrower equally between the bank and SEFA.
Furthermore, the challenges of the high transaction costs, not having control over the process, and the uncertainty that the claim will not be paid still remain. Moreover, as highlighted by Malhotra et al. (2007) above, both the Individual-retail-selective model and the Portfolio model were not effective abroad due to the lack of interest by the banks due to the high cost.